79) Winter Corporation's taxable income is $500,000. In addition, Winter has the following items: Depreciation for tax purposes $60,000 Depreciation for financial accounting purposes 40,000 Net capital loss (2,000) Interest on loan to acquire tax-exempt securities 7,000 What is Winter's financial accounting income? A) $511,000 B) $513,000 C) $518,000 D) $520,000 Answer: A
Explanation: A) Taxable income 500,000 Plus: difference between book and tax depreciation 0,000 Minus: net capital loss ( 2,000) Minus: interest on loan to acquire tax-exempt securities ( 7,000) Financial accounting income $511,000 Page Ref.: C:3-40 and C:3-41 Objective: 6
80) Lass Corporation reports a $25,000 net capital loss this year. The corporation reports the following net capital gains during the past three years. Net Long-Term Net Short-Term Year Capital Gain Capital Gain Third previous year $5,000 $6,000 Year before last 7,000 3,000 Last year -0- -0- Determine the amount of net capital loss carried back to each preceding tax year and the amount of capital loss, if any, available as a carryforward.
Answer: The capital loss offsets all $11,000 of capital gain reported in the third previous year, and
$14,000 can be carried over to the year before last. $10,000 of the carryover is used in the year before last, leaving $4,000 to be carried over to next year.
Page Ref.: C:3-7 Objective: 2
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81) Jackson Corporation, not a dealer in securities, realizes taxable income of $80,000 from the operation of its business. Additionally, Jackson Corporation realizes a $10,000 long-term capital loss from the sale of marketable securities. Explain the treatment of the loss on the corporate return for this and any other years.
Answer: The loss cannot be deducted this year since Jackson did not report any capital gains. The loss must be carried back to the three preceding tax years and used as a short-term capital loss. If part or all of the loss is unused as a carryback, it can be carried forward as a short-term capital loss for five years. Page Ref.: C:3-7 Objective: 2
82) Bright Corporation purchased residential real estate five years ago for $450,000, of which $50,000 was allocated to the land and $400,000 was allocated to the building. Bright booked straight-line MACRS
deductions of $55,000 during the past five years. This year, Bright sells the property for $550,000, of which $100,000 is allocated to the land and $450,000 is allocated to the building. What is the amount and character of Bright's recognized gain or loss on the sale?
Answer: Bright recognizes $50,000 ($100,000 - $50,000) of Sec. 1231 gain on the sale of the land. Bright also recognizes $105,000 [$450,000 - ($400,000 - $55,000)] on the sale of the building, of which $11,000 (20% of the lesser of (1) $55,000 depreciation claimed, or (2) $105,000 gain recognized) is ordinary income
recaptured under Sec. 291. The remaining $94,000 ($105,000 - $11,000) gain on the sale of the building is a Sec. 1231 gain. Page Ref.: C:3-7 Objective: 2
83) Ryan Corporation sells a commercial building and land. The sales proceeds attributable to the
building is $145,000. When purchased, the building is allocated $75,000 of the purchase price. The firm has depreciated the building using the MACRS rules. The MACRS deductions taken total $60,000. What is the amount and character of Ryan's recognized gain?
Answer: Realized gain: $145,000 - ($75,000 - $60,000) = $130,000 Sec 291 gain: $15,000 × 20% = $3,000
Sec. 1231 gain = $127,000, Sec. 291 gain - $3,000
Since the building is Sec. 1250 property, straight-line depreciation is recaptured to the extent of 20% under Sec. 291. The remaining $127,000 gain is a Sec. 1231 gain. Page Ref.: C:3-7 Objective: 2
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84) The following expenses are incurred by Salter Corporation when it is organized on July 1:
Attorney fees to draft charter $20,000 Underwriter fees for stock sale 10,000 Transfer cost for property contributed to the corporation for stock 4,000 Costs of organizational meetings before beginning business 5,000 Costs of directors' meetings after beginning business 8,000
Salter commenced business on September 8. What is the maximum amount of organizational expenditures that can be deducted by the corporation for its first tax year ending December 31?
Answer: $20,000 + $5,000) = $25,000 total organizational costs. Deduction is $5,000 + [6 × (20,000/180)] = $5,667.
Page Ref.: C:3-8 and C:3-9; Example C:3-5 Objective: 2
85) On December 10, 2011, Dell Corporation (a calendar-year taxpayer) accrues an obligation for a
$100,000 bonus to Muriel, a sales representative who had had an outstanding year. Muriel owns no Dell Corporation stock. The bonus is paid on May 5, 2012. What is Dell's deduction for 2011? What is Dell's deduction for 2012?
Answer: Dell is allowed $0 deduction for 2011 as the bonus is not paid by March 15, 2012. Dell will take the $100,000 deduction in 2012. Page Ref.: C:3-10; Example C:3-7 Objective: 2
86) Chambers Corporation is a calendar year taxpayer using the accrual method of accounting. In 2011, its board of directors authorizes a $20,000 contribution to the Boy Scouts. Chambers pays the contribution on March 12, 2012. What is the maximum contribution allowed in 2011? What is the maximum contribution allowed in 2012?
Answer: The maximum allowable in 2011 is $20,000. Chambers may elect to treat all or part of the
contribution as having been made in the year in which it was accrued. If Chambers makes this election, it may take the remaining amount in 2012. In this case, $0 would be remaining. If Chambers does not make the election, the $20,000 contribution is deductible when paid in 2012. Page Ref.: C:3-11 Objective: 2
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87) Prince Corporation donates inventory having an adjusted basis of $26,000 and an FMV of $40,000 to County Hospital, which is a qualified public charity. What is the amount of Prince's deduction?
Answer: Prince may deduct the adjusted basis plus 50% of the excess of the property's FMV over the adjusted basis (not to exceed twice the property's adjusted basis) for a total of $33,000 [$26,000 + (.50 × $14,000)] provided the property is related to the donee's exempt function, and it is used solely for the care of the ill..
Page Ref.: C:3-12 Objective: 2
88) During the year, Soup Corporation contributes some of its inventory to a qualified charity for use in feeding the needy. The inventory has an FMV of $85,000 and an adjusted basis of $25,000. What is the amount of Soup Corporation's charitable contribution deduction for the donation of the inventory as determined without regard to the overall charitable contribution limitation?
Answer: $25,000 + 0.50 ($85,000 - $25,000) = $55,000 tentative deduction. This amount is limited to twice the property's adjusted basis, or $50,000 (2 × $25,000). Soup Corporation can claim a $50,000 deduction. Page Ref.: C:3-12 Objective: 2
89) Bermuda Corporation reports the following results in 2009 and 2010: 2011 2012 Adjusted taxable income $400,000 $600,000 Charitable contributions 70,000 50,000 What is Bermuda's contribution deduction in 2011 and 2012? What is the disposition of any remaining amount?
Answer: Bermuda's 2011 contribution deduction is limited to $40,000 (0.10 × $400,000). Bermuda has a $30,000 ($70,000 - $40,000) contribution carryover to 2012. The 2011 contribution deduction is limited to $60,000 (0.10 × $600,000). Bermuda's deduction for 2012 is composed of the $50,000 donated in 2012, and $10,000 of the 2011 carryover. A $20,000 carryover from 2011 carries over to 2013, 2014, and 2015. Page Ref.: C:3-13; Example C:3-11 Objective: 2
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90) Zerotech Corporation donates the following property to an elementary school:
? Computer printer purchased three years ago for $1,000. The printer has a $500 FMV and $-0- adjusted basis on contribution date.
? Computer equipment acquired one year ago at a cost of $5,000. The equipment has an $8,000 FMV and $0 adjusted basis on contribution date.
? Computer software acquired two months ago at a cost of $10,000. The software will be used in a prekindergarten program. Its FMV on the contribution date is $10,000 and it has an adjusted basis of $0.
a) Identify any donation qualifying for special treatment. b) What is Zerotech's charitable contribution deduction? Answer:
a) None of the equipment qualifies for a special deduction. b) There is no charitable deduction. Page Ref.: C:3-11 Objective: 2
91) Francine Corporation reports the following income and expense items for the tax year ending December 31:
Gross receipts from sales $55,000 Dividends received from 15%-owned domestic corporation 28,000 Expenses connected with sales 20,000
What is Francine Corporation's taxable income?
Answer: $55,000 + $28,000 - $20,000 - (0.70 × $28,000) = $43,400. The dividends-received deduction limitation is $44,100 [($55,000 + $28,000 - $20,000) × 0.70] and does not apply. Page Ref.: C:3-15 Objective: 2
92) Carter Corporation reports the following results for the current year:
Gross profits on sales $660,000 Dividends from less than 20%-owned corporations 300,000 Operating expenses 650,000
a) What is Carter Corporation's taxable income for the current year?
b) How would your answer to Part (a) change if Carter's operating expenses are instead $700,000? c) How would your answer to Part (a) change if Carter's operating expenses are instead $760,000? Answer:
a) Carter's taxable income is $100,000 ($660,000 + $300,000 - $650,000 - $210,000 DRD). The DRD limitation is $217,000 [0.70 × ($660,000 + $300,000- $650,000)] and does not apply.
b) Carter's taxable income is $78,000 ($660,000 + $300,000 - $700,000 - $182,000 DRD). Since an NOL is not created by claiming the full $210,000 DRD (see Part a), the DRD is limited to 70% of $260,000 (660,000 + 300,000 - 700,000), or $182,000.
c) Carter reports an NOL of $10,000 ($660,000 + $300,000 - $760,000 - $210,000 DRD). No limitation on the DRD is imposed if the result is an NOL when the full $210,000 DRD is claimed. Page Ref.: C:3-15 through C:3-18 Objective: 2
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